CHAPTER XXVI

Pure Agent Concept in GST

Introduction

The GST Act defines an Agent as a person including a factor, broker,
commission agent, arhatia, del credere agent, an auctioneer or any other
mercantile agent, by whatever name called, who carries on the business of
supply or receipt of goods or services or both on behalf of another.

So, who is a pure agent and why is a pure agent relevant under GST?
Broadly, speaking a pure agent is one who while making a supply to the
recipient, also receives and incurs expenditure on some other supply on
behalf of the recipient and claims reimbursement (as actual, without adding
it to the value of his own supply) for such supplies from the recipient of
the main supply . While the relationship between them (provider of service
and recipient of service) in respect of the main service is on a principal
to principal basis, the relationship between them in respect of other
ancillary services is that of a pure agent.

Let’s understand the concept by taking an example. A is an importer and B
is a Custom Broker. A approaches B for customs clearance work in respect of
an import consignment. The clearance of import consignment and delivery of
the consignment to A would also require taking service of a transporter. So
A, also authorises B, to incur expenditure on his behalf for procuring the
services of a transporter and agrees to reimburse B for the transportation
cost at actuals. In the given illustration, B is providing Customs Brokers
service to A, which would be on a principal to principal basis. The
ancillary service of transportation is procured by B on behalf of A as a
pure agent and expenses incurred by B on transportation should not form
part of value of Customs Broker service provided by B to A. This, in sum
and substance is the relevance of the pure agent concept in GST.

Relevance of Pure Agent under GST

The concept is borrowed from the erstwhile Service Tax Determination of
Value Rules, 2006 and carried forward under GST. Under the GST Valuation
Rules 2017 pure agent is given the following meaning.

“pure agent” means a person who –

a) enters into a contractual agreement with the recipient
of supply to act as his pure agent to incur expenditure or costs in the
course of supply of goods or services or both;

b) neither intends to hold nor holds any title to the goods
or services or both, so procured or provided as pure agent of the recipient
of supply;

c) does not use for his own interest such goods or services
so procured; and

d) receives only the actual amount incurred to procure
such goods or services in addition to the amount re- ceived for supply he
provides on his own account.

The important thing to note is that a pure agent does not use the goods or
services so procured for his own interest and this fact has to be
determined from the terms of the contract. In the illustration of importer
and Customs Broker given above, assuming that the contract was for
clearance of goods and delivery to the importer at the price agreed upon in
the contract. In such case, the Customs Broker would be using the transport
service for his own interest (as the agreement requires him to deliver the
goods at the importers place) and thus would not be considered as a pure
agent for the services of transport procured.

Another important fact is that, the person who provides any service as a
pure agent receives only the actual amount for the services provided.
Coming back to our example of Importer and Customs Broker, the agreement
provides reimbursement of transport services utilised at actuals. In this
case, let’s say the value of transport service was Rs.10, 000/-. If the
Customs Broker charges any amount more than Rs.10,000/-, then he will not
be considered as a pure agent for the services of transport and the value
of transport service will be included in the value of his Customs Broker
service.

Exclusion from value

Expenditure incurred as pure agent becomes relevant, when it comes to
determining the value of a supply for levy of GST. The preceding para
explains who will be considered as a pure agent. The valuation rules
provide that expenditure incurred as pure agent, will be excluded from the
value of supply, and thus also from aggregate turnover. However, such
exclusion of expenditure incurred as pure agent is possible only and only
if all the conditions required to be considered as a pure agent and further
conditions stipulated in the rules are satisfied by the supplier in each
case.

The supplier would have to satisfy the following conditions (in addition to
the condition required to be satisfied to be considered as a pure agent)
for exclusion from value as under:-

1. the supplier acts as a pure agent of the recipient of the supply, when
   he makes payment to the third par- ty on authorization by such
   recipient;

2. the payment made by the pure agent on behalf of the recipient of supply
   has been separately indicated in the invoice issued by the pure agent to
   the recipient of service; and

3. the supplies procured by the pure agent from the third party as a pure
   agent of the recipient of supply are in addition to the services he
   supplies on his own account.

In case the conditions are not satisfied, such expenditure incurred shall
be included in the value of supply under GST.

The following illustration will make the concept clearer.

• Corporate services firm A is engaged to handle the legal work pertaining
  to the incorporation of Company B.

• Other than its service fees, A also recovers from B, regis- tration fee
  and approval fee for the name of the company paid to Registrar of the
  Companies.

• The fees charged by the Registrar of the companies, reg- istration and
  approval of the name are compulsorily lev- ied on B.

• A is merely acting as a pure agent in the payment of those fees.

• Therefore, A’s recovery of such expenses is a reimburse- ment and not
  part of the value of supply made by A to B.

Some examples of pure agent are

1. Port fees, Port charges, Custom duty, dock dues, transport charges etc.
   paid by Customs Broker on behalf of owner of goods.

2. Expenses incurred by C& F agent and reimbursed by principal such as
   freight, godown charges.

Illustration

Suppose a Customs Broker issues an invoice for reimbursement of a few
expenses and for consideration towards agency service rendered to an
importer. The amounts charged by the Customs Broker are as below:

Sl. No.	Component charged in invoice	Amount
1	Agency Income	Rs. 10,000/-
2	Traveling expenses ; Hotel expense	Rs. 15,000/-
3	Customs Duty	Rs. 55,000/-
4	Docks Dues	Rs. 5000/-

In the above situation, agency income and travelling/ hotel expenses shall
be added for determining the value of supply by the Customs Broker whereas
Docks dues and the Customs Duty shall not be added to the value provided
the conditions of pure agent are satisfied.

Conclusion

A pure agent concept is an important one for businesses as it has direct
implications on the value of taxable service. It has direct bearing on the
amount of GST charged on a particular supply. It also has bearing on the
aggregate turnover of the supplier and therefore on calculating the
threshold limit for registration. Whenever the intention is to act as a
pure agent, care should be taken to ensure that the conditions specified
for such pure agents and further conditions given in the valuation rules
are also met so that only the real value of the service provided is
subjected to GST.